The archived blog of the Project On Government Oversight (POGO).

Aug 06, 2012

Defense Contractor Time Machine: Less Spending, More Jobs, Analysis Reveals

By BEN FREEMAN, Ph.D

For nearly a year, defense contractors have been arguing that potential cuts in Pentagon spending could have a devastating effect on jobs. If military spending is cut via the sequestration mechanism outlined in last year’s Budget Control Act, more than 1 million jobs could be lost, an industry group has argued. The North Carolina News and Observer reported that Sen. Lindsey Graham (R-S.C.) told a Fayetteville, N.C. audience on July 30 that the impact of sequestration on employment would be so severe that it “would be like every major employer in my home state closing down at one time or cutting their business in half.”

Or would it?

According to the Congressional Budget Office, if the sequestration axe falls, the Department of Defense's base budget would still be larger than it was in 2006 (adjusting for inflation).

And, at the end of 2006, according to an analysis by the Project On Government Oversight, the nation’s five top defense contractors employed more people than they did at the end of 2011.

At the end of 2006, the five companies employed a total of 577,200 people, according to reports they filed with the Securities and Exchange Commission. That was slightly more than the 520,900 they reported at the end of 2011.

The POGO study included Lockheed Martin, Boeing, General Dynamics, Northrop Grumman, and Raytheon.

To be sure, there are wrinkles in the numbers. One big one: Northrop Grumman split from its Huntington Ingalls shipbuilding business in 2011, taking the Huntington Ingalls employees out of the year-end jobs total for the top five contractors. But, adding back those 38,000 employees, the five contractors still employed 3.3 percent more workers at the end of 2006 than at the end of 2011.

Over the five-year period, total employment at the companies declined even as the total federal contract dollars awarded to the firms rose.

According to data from the Federal Procurement Data System, the amount of money the government awarded the companies – a measure called dollars obligated – rose from about $91 billion in the 2006 fiscal year to about $113 billion in the 2011 fiscal year, an increase of 24.6 percent.

Measuring the change in constant 2011 dollars to adjust for inflation, the annual totals over that time span increased from $101 billion to $113 billion, an increase of more than 10 percent.

In response to this rise in contract dollars received and decline in employment, a spokesman for the Aerospace Industries Association, the leading defense contractor advocacy group, told POGO the industry “has been actively pursuing efficiencies.”

Lockheed Martin chief executive Robert Stevens has said the potential reductions in Pentagon spending would be “a blunt-force trauma to industry.” And, in an annual report, Lockheed said that sequestration would lead to “personnel reductions that would severely impact advanced manufacturing.” But Lockheed was awarded $10.4 billion more by the government for 2011 than for 2006 (a 32 percent increase), and at the end of 2011 it employed 17,000 fewer employees than in 2006 (a 12 percent decrease).

At Raytheon the same pattern emerges. The value of the firm’s contracts with the government increased by more than 50 percent from 2006 to 2011, yet the number of people it employed declined by 11 percent. A spokesman for the firm said this is, “a clear indication of the company’s productivity.”

Of the top five defense contractors, only Boeing and General Dynamics increased the number of individuals they employed from 2006 to 2011.

General Dynamics was the only firm which both was awarded more contract money and added jobs.

While Boeing added jobs overall, a spokesman for the company said that in the firm’s government contracts workforce, “We’ve had a net loss of about 8,000 jobs.” Unlike the other four defense contractors POGO analyzed, Boeing derives a majority of its revenue from the private sector – for example, selling passenger jets to airlines.

Northrop Grumman’s workforce plunged sharply, by 49,700. Most of that decline – 44,600 –occurred in 2011 alone. A spokeswoman for the company explained that the large drop was primarily the result of the firm separating from the Huntington Ingalls shipbuilding operation.

POGO’s analysis does have limitations, however. First, the U.S. government in general and the Department of Defense in particular are not the companies’ only clients; their annual revenues vary based in part on sales to other customers. Lockheed, for instance, reported that it derived 82 percent of its sales from the U.S. government in 2011, including 61 percent from the Department of Defense.

Second, based on public disclosures, it isn’t clear how many of the firms’ employees were working on government contracts in any year and whether the job reductions were directly related to government contracts.

Third, POGO’s analysis cannot and is not intended to predict what will happen if sequestration occurs.

The data show, however, that the top five defense contractors, collectively, were cutting jobs while being awarded more taxpayer dollars. In fact, these companies were thriving, not just in terms of federal contracts, but in overall financial performance. A PricewaterhouseCoopers review of the aerospace and defense industry said that 2011 was "a second consecutive year of record revenues and profits."

Ben Freeman is a national security investigator for the Project On Government Oversight.

Comments

So – The TOP 5 Companies tell the whole story here huh ? And what about the THOUSANDS of Small Businesses out there who rely on selling and providing services to the Fed Gov? We’ve already lost most of our work thanks to Obama’s Insourcing push. They’ve already hurt Small Businesses nationwide and created a situation where the Federal Government is now unfairly competing with the Private Sector
http://www.youtube.com/watch?v=pP8iLY2PH-o
..and now we’ll lose what little we have left ?
And when thousands lose their jobs and Companies close …what will POGO have to say ? Sorry ..guess we were wrong ?

This study appears to be seriously flawed. Anyone who has worked in this industry for more than a few weeks realizes that 1) there is amazing amount of 'outsourcing' going on, much of it required by the FAR, so we tend to subcontract to the maximum extent we can, and 2) that despite efforts at improving efficiency and such, virtually every dollar goes to a salary somewhere. It may not be the Lockheed Martin (LM) CEO, of course, or even the LM employee, or even the subcontractor employee, it could very well be the guy who builds the 'screw' that goes in the sub-subassembly, that goes into the a subassembly, that goes into a component, that goes into a line-replacable unit (LRU), that goes into a subsystem, that then goes into a major defense system produced by LM. (It is true that a little bit of this dollar goes into raw material, but it takes someone's labor to get that raw material out of the ground or wherever it comes from--so it is only a tiny tiny portion of the top dollar.)

To think that cutting a dollar at the defense spending/budget level does NOT impact almost a dollar of someone's labor somewhere, is just fallacious thinking. This applies to ALL government spending, by the way, it is certainly by no means unique to the Defense budget. If you cut the defense budget (or any other budget) by 10%, you WILL find that 10% of the people that live on this dollar will lose their jobs--unless of course, everyone gets together and decides to take a 10% pay cut, which, in the case of our undeclared but obvious inflation, is not likely.)